Episode 009 - What is Money?
Spoiler Alert: I don’t know the answer to this question. But in my quest to understand it, and the art of using it to acquire what we need, I’ve discovered many stories and hacks along the way. In this episode I’m going to tell a few of them, including an overview of my adventures with Bitcoin.
On this episode we discuss the what money is, its history and my adventures with Bitcoin.
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Like most people, I never questioned what Money is. I was raised as a kid to have a savings account at the local bank branch. Parents would proudly drag their kids into the bank and open a savings account for them. They would talk about piggy banks, and how you should save your money, etc. I just went along for the ride. It wasn’t until I was about 8 years old that I started to see that I needed money to get the things I wanted in life. But my paltry allowance wasn’t enough, so I started to learn how money was made. I got a paper-round and was the kid on the bicycle that rode around the neighborhood, throwing papers from my bike onto people’s lawns, and then once a month I got a bunch of money put into my bank account. Seemed like magic.
So I wanted more. I got a 2nd paperround. Now I found myself up at 3AM, 3 times a week, out there riding and throwing more newspapers. My biggest obstacles were dealing with rolling hills that were hard to ride up and constant harrassment from bullies out there wanting to give the local paperboy a hard time. I just got up earlier before they were awake and got my job done then. It was hard, but I never was overwhelmed by it. I just thought that money was created by hard work.
I realize now that this was wrong. Money is not “created”. It is exchanged from one party to another. And money should NEVER be created by hard work. Because that never lets you scale. I had scaled my little newspaper delivery business to two rounds, but that was the maximum I could personally do. I could try and hire others to pick up new paper-rounds, but what exactly was I bringing to the table that they could not do themselves? In the end, I had maxed out my business. But still the money flowed in. And with that, I had eventually ammassed enough to buy things that I wanted.
Meanwhile the rich kids at my school could have anything they wanted because their parents would just buy it for them. They got the latest trainers, they latest bikes, the latest fashion.... As we all got older, they eventually got given cars, etc. I didn’t. I had to work for everything. But the thing is that as I realized I was doing things the hard way, I started to look deeper at why I couldn’t get what they had, and what I had to do in order to get those things. Those early lessons established a context of which my capitalistic life would follow. But it wasn’t until I was in my late 40s that I started to realize I probably got it all wrong from the start, and if I only understood money I could have had the things I wanted without all that hard work, etc.
Let’s talk about this.... First, what do you want in life? If you understand that from the start, at least you can set some context for how you live your life to get it.
Most people don’t ever do this, but it is critical. For the unconstrained, I would suggest the following might be common answers to this question:
· Food & Water
· Technology & Communications items
· Lifestyle items (ie. nice clothing, travel, jewelry, etc.)
· Transport (a car)
· Shelter (a house)
· Education (for you or for your kids)
If we accept that we want these things, the next step that 99% of people do is to put a “price tag” on those things and begin the process of working to achieve them. Many just put a price tag on them and find how to get them early because they have no patience and get credit cards, mortgages, car loans, student loans, etc. so that they can get to the end point of achieving that fast.
In the end, achieving these things often becomes a trade-off of one to the other. For example, no one would actively give away their freedom to another. We humans value our independence above most things, and yet when it comes to obtaining all the other items on a list like this, often we give our freedom away without consideration. For example, if you lived in a communist regime, you would give away your freedom & independence to the state in order to be given all the other things on this list. Yet the quality of what you get may be sub par, still you are giving up the fact that you don’t either have the skills or willingness to be responsible for obtaining the other items on the list, and therefore you give up your one true freedom in order for a third party to provide the other items. Even if it means your allegiance to that third party may come with you giving up your own life to serve the state in whatever capacity they elect is in their best interest.
For those of us raised in the western world, this is a horrible scenario. We value freedom above all else.
Yet here’s the dichotomy... We give that freedom away by using money as a tool of measurement of value and by having no patience to obtain our needs immediately, so we give our freedom to a third party (ie. a bank) to achieve those things immediately rather than defering them until we can obtain them without sacrificing our freedom.
The bank has a goal of taking their money and generating revenue from the use of “lending” it (not giving it, but lending it) to their customers. They don’t pay you for the use of your money in any meaningful way, but they charge enormously for the use of their money. Just so you can have all these things before you have earned the capital to buy them. And you are constantly trolled into thinking that you deserve to have things early in life. Hence you sell out your future working capacity to get money now, and if you are unable to meet the future committments, they will take those things away from you and make it next to impossible to obtain them back in the future.
Isn’t this the same level of enslavement as giving up your freedom to the state in order to get those things? You have just changed the party that you are giving up your freedom - maybe a bank doesn’t have the same power to enlist you into the military or put you in prison, but in a world where money dictates life freedom, they can take away the freedoms you desire. In truth, you gave them up by expecting to have things before you had earned them.
That said, there is something more sinister going on here. Since everything has some measurement of value and we choose to use our local currency as a way to dictate the value of your labor (ie. your earnings) and the value of the things you want in life (ie. your purchases), the level of effort you have to undertake is going to be the value you place on your earnings vs. the value you place on your purchases. You can quickly lessen the divide between these two factors and achieve what you want in life mathematically or you can just remove the concept of using money to acquire those things by creating a way to obtain them through other means.
Imagine that you stop considering yourself just to be a purchaser of these things, and you realize that you can also participate as a supplier. For example, let’s say you had an endless supply of one thing and you wanted to sell it to others for some reward. If you use money as a reward, this means you are assuming some form of counterparty has to be involved in each transaction. For example, let’s say I grow tomatoes. I want to sell them when I harvest my crop. If I go to a farmer’s market and I sell tomatoes there, I put some price (in my local currency) for them. People who want my tomatoes will pay me that price in some mutually trusted and accepted currency (ie. cash). I trust that they are not giving me counterfeit currency and that I can spend that currency for a value that we both accept is suitable for them to buy at and for me to accept as remuneration for my harvest. After the market day is over, I hold the currency and hope it doesn’t get confiscated from me. I also trust that the value that the currency has will be stable from one day to the next, so that my calculations of price were representative of the actual buying power the money gets me.
But if I recognize that my goal might be to buy food (and let’s assume we can’t just live on tomatoes alone), and that I’m at a farmer’s market anyway and other growers who have beans, rice, corn, honey, etc. are ultimately the endpoint that I want to get their products thereby giving me a diversified supply of food, what if I could just exchange or barter the tomatoes for their products? If we didn’t have money as the medium of exchange, and we agreed of some value of tomatoes to corn, for example, - let’s say 2 tomatoes = 1 bushel of corn, we could simply trade and all parties would have their needs met.
What happens when we do this? First, we are the agreed definers of value of a tomato. Second, there is no middle man so that the middle man has the opportunity to charge some fee to exchange currency. For example, if I only take cash and the buyer has a bank account, in order for them to get the cash it may be that they have to pay some ATM fee to get access to their cash. That is avoided if there is no cash involved in the transaction at all.
Additionally, there may be a tax authority that is going to tax the exchange based on money. But if there is no money involved, there is no basis of tax and consequently no tax is payable. This applies to any taxes charged at the time of sale (ie. sales tax) and any taxes charged on the earning of money for the purchase (ie. income tax). Yet all parties in this transaction have had their needs met.
When you look at the anatomy of a transaction like this, and that you have a well defined list of things you need in life, you realize that it may only apply to the smallest of items on that list. However this is where I was wrong in my assumptions. And it came down to understanding why money exists....
Quick historical lesson on Banking
In the early history of Venice, the Roman Catholic church pretty much ruled the basis of laws and government in Italy. They had strict interpretation of law based on the bible, and one of those laws forbid the lending of money, specifically the charging of interest to lend money. This removed any incentive of doing it. Yet on the mainland of Italy, there were farmers. Those farmers needed to purchase seed to plant their crops. Prior to harvest they had to pay labor to harvest the crop before they could bring the crop to Venice and sell the crop in the markets. If they didn’t have any capital, they couldn’t acquire seed meaning that they couldn’t produce crops. Clearly this was not only bad for the individual farmer, but it was bad for the city of Venice. No crops meant no food.
In a part of Venice is an area called the Cannaregio there was an area that Jews found to be a secure place to live despite the restrictions imposed on them by central Europe. When the catholic church imposed laws to make “money lenders” illegal based on Christian laws, the Jewish people found a hack in the system. They were not restricted from lending money and charging interest to gentiles based on their laws, and the Christian laws provided them with an opportunity to support the farmers and others than needed capital to acquire seed, build properties, etc. and consequently the emergence of investment banking started from those Jewish areas. This continued and flourished in Venice for some time. The concept of a “bank” was created, and three of these banks existed in the Jewish Ghetto, operating from pawn shops that had different colors. There was the “Il banco Rosso”, “Il banco Verde” and “il banco Nero”, the Red, Green and Black banks. These colors were based on the color of the receipts given to customers. And from this the term of “going into the red” became a part of regular conversation regarding holding debt.
From this little piece of history it is pretty obvious why we need banks. There are future purchases that are predictable and needed, and in this case obvious within the cycle of farming. But there are other purchases that are needed that are large and access to capital is required in order to begin trade. Property development is likely to be a big one. Or buying a boat in order to be able to transport or fish.
In places where money is hard to get, you need a long history of banking relationship, etc. one had no choice other than to “bootstrap” themselves into business. That’s how I did it. I did get a small line of credit to obtain computers and initial capital equipment to fund my first small business. And yes, we didn’t get to draw any wages or income from the business for about 2 years since it started. But I learned very quickly that I really didn’t have to. The business had expenses that had to be paid from its income, so as long as I was able to generate income with my work, I could have the business pay the expenses. Sure, I was not supposed to have the business pay for my personal expenses, but it was often hard to determine what was personal and what was business. For example, a phone bill for your mobile phone may be shared between business use and personal use. Are you able to work out the difference? Probably not, so by default pay it from the business. Most entrepeneurs learn quickly that this technique can be applied to many things and they eventually “become” their business. And this means that the relationship between business earnings and personal expenses can be brought closer together.
What I learned quickly was that if I had a list of things that I needed, there were many ways to get them by using either barter techniques, or running a business to generate the revenue (ideally with little or no human labor) that could then acquire them and allow me the use of them as part of its ongoing needs.
Once you start to go down the rabbit hole with this, then you start to see that money as a form of exchange starts to change. There’s a very popular term in the financial independence community called “House hacking”. The idea is that you buy a place that you want to live in, and yet it has multiple sub-dwellings (ie. rooms, units, casita, etc.) and that you rent out those sub-dwellings in such a way that they pay more than the cost of the mortgage on the property, which not only means you are having your tenants pay off your property, but you get to live rent free in the master dwelling. This is brilliant.
I use this technique for dozens of properties to eventually pay them off, so that I have an ongoing income stream in my future that will come in without any debt obligation to a bank. And if you have enough of these rental units in place, the positive cashflow that can come from regular refinancing of mortgages (assuming reducing interest rates, and reducing principal values, and increasing rents) means that quickly you can amass enough positive cashflow to pay off your own mortgage on your own house. It means that you still need to do a deal with banks, but by not selling your working future, but by selling the increasing positive cashflow of your other assets, you can service your own mortgage, get the tax deductions from it all and basically your tenants are making you wealthy. All while the real estate property values increase.
Between the use of a business to pay for other expenses that you may need, the concept of bartering of things that you have for things that you need, and the use of assets to generate income that can then cover your own needs, there are few items on the list that cannot be acquired in a sustainable manner.
And in the case of things like Healthcare (which in the USA really means health insurance premiums and deductible costs), you can offset the bulk of those by using medical tourism to acquire services that you need and can schedule ahead of time because you didn’t sell out your time to a boss for a paycheck and have the freedom to travel and find opportunity in geo-arbitrage (ie. buying something in one region that is significantly cheaper than another region).
Which brings me to Bitcoin.
When I discovered bitcoin, I needed it for its utility purpose. I had some software developers working for me that were in other parts of the world. One of them lived in Bangladesh. He was a very talented programmer and had been a great contributor to my business. I needed to pay him for his time, and because his economy didn’t require the same level of payment as a local developer in the USA, it was an advantage for me to send him the work. But when it came to paying him, it was a major problem. His country had a long history of corruption in government and as a result, didn’t have a reciprocal banking agreement with the USA. I couldn’t use PayPal or other electronic payment services for him. I literally had to wire him money. This meant a bank was charging me $50 to originate a transaction to him. I tried using Western Union or other money services, but they would take 2 weeks to get the funds to him and I had to go to the bank, get cash, drive over to a Western Union money center and create the transaction, pay them up to 27% of the transaction to send it, etc. This was insane.
It came down to the point where as much as I was enjoying his output, I couldn’t sustain this payment cycle. Then we discovered this new thing in 2011 called “Bitcoin”. It actually came to my attention because of what I was seeing the banking industry doing to another Australian ex-patriot, Julian Assange and his Wikileaks site. They had shut down all funding to him through banks, VISA, Mastercard, AMEX, etc. and he still needed to pay to have his servers running. He had told people they could pay him directly in Bitcoin, which then made me interested to understand what it was. As I studied it, I realized just how it fixes all the problems of needing a counterparty in all transactions, and that the value of the currency was based on the simple concept of supply & demand (as there are a finite number of BTC that can enter the money supply), it seemed too good to be true.
We setup wallets between me and my guy in Bangladesh and quickly saw the instant transfer of BTC betwen us. But then he had to convert that to local currency.
In those days, the only way to get BTC was to use an exchange in Japan called “MTGOX”. This was a service setup originally for trading virtual goods in MMORPG games, and not really the sort of place you want to do financial transactions. But it served a purpose. Since I had to do a bank wire to get BTC from there, and that was going to cost me $50, I decided to purchase a lot of BTC and hold it. I needed it for future payments to my guy. But he couldn’t spend it, so we needed to solve that problem.
Before MTGOX got hacked and people lost their holdings, we discovered a new exchange in Hong Kong that was one of the first that provided a way to get a Debit card that could be used at local ATM’s and we both signed up for one of those debit cards to try it out. I remember going into my local BestBuy and trying it, and it worked! I told him that it worked and that he should too. He went to a local ATM in Dhaka, and tried it and he got cash. It didn’t cost that much at all in fees, and we had just solved the end-to-end transfer problem at pennies compared to the costs before, and instantly. I could send him BTC into his wallet instantly, he could then go to the local store ATM and get cash out and buy what he needed. So I moved all of my BTC over to this exchange in Hong Kong and that’s how we operated for years.
I had become this ardent supporter of Bitcoin because of what it had shown me - a way to break free of the bank controlled monetary system and get back to a peer to peer level transaction. It was incredible - he could get 99% of the money he made without having to pay banks for transfer, and I was also saving hundreds each month and not having to physically jump through hoops.
Then some weird things started to happen. Because there was a finite supply of BTC (only 21 million can every be mined), the value of each BTC started going up and up and up. I think the original price I paid for my first stash of BTC was somewhere around $11 each. I saw them go up as high as $1,100 each before Mt Gox was hacked and prices dropped down to below $200 each. But this signalled to me that anything with a finite supply was going to be worth more as others discovered it could be used to purchase things. Just as I had discovered its use, other services started to emerge. You could use services like Gyft to buy gift cards with BTC. You could buy Dell computers with it. NewEgg.com started to accept it. It started to look like this was going to destroy PayPal and take over electronic commerce. So I bought more at around $200 each. I just kept buying. I just kept telling friends of what I was doing and that they might want to do the same. Few decided to.
The rest of this story is pretty obvious. In late 2017, the BTC price rose to $20,000 each. Then I saw the worst side of humanity ever. I saw greed and disgusting human behavior. Rather than using it as an investment, people would sell their new found wealth for “lambos” or other things that would depreciate immediately. They felt that because they didn’t do anything to get the wealth they could just spend it without thought. They had no idea why it was invented - just that many that lucked into it early found themselves instantly wealthy. Eventually all the world started to pay attention to it, and that meant banks wanted it gone. Govts would either ban it or tax it or regulate it. The media put such a negative spin on it because they would tell the story that it was being used to fund illicit activities and purchases, terrorism, etc. There was some of that going on, but there was still far more of that being funded with US cash rather than traceable Bitcoin. Something that was a bit more complex than cash was easily able to be turned into something evil.
Yet what I saw in the Bitcoin community was something that paralled the activity of the Jewish people in Venice. Their govt had banned lending with interest, and yet they could find a way to exploit a chink in the verbatim statements in the New Testament of the bible, which enabled them to create enormous wealth in banking and feed the people of Venice with food. Clearly this was a demonstration that govts don’t necessarily act in the best interests of their people all the time.
Was Bitcoin the same “hack” that the Jewish people of Venice found themselves able to exploit? I thought so originally. But in late 2017 after witnessing the horrible human behavior around greed and seeing the looming threat of regulation of government, I ended up selling all of my BTC (thankfully at a high price) and cashing out. With the massive rewards that came with that, I paid off real estate mortgages to live freehold and generate enough positive cashflow in rental income where I never had to work again. I retained a very small amount which eventually I cashed that, in mid 2019, which I then invested in my own body - by paying for a total shoulder replacement surgery in Mexico. I will live until the day I die with a prosthetic made of Bitcoin in my body. And the story in the back of my mind that hacking the system really has its advantages.
The moral of the story
We live in a world where money is conjured up out of thin air. We no longer have any physical basis of value. We left the Gold standard in the 1970s and floated the value of money on perception. With this, we created the desire to have it all sooner than we are entitled to, and this permeates into govt policy. We live in a world now where money isn’t the currency, but debt is. There is more debt than money now, so the entire capitalistic system focuses more on interest rates than they do on the basic concept of businesses making a profit.
Look at Wall Street and the DJIA. This valuation of the marketplace simply tells us that it goes up when Federal Reserve banking define interest to go down, and it goes down when the same Fed Reserve puts interest rates up. This manipulation means that a bunch of smartypants economicsts with lots of letters after their names are defining the value of a paperclip and how power your money has to buy the things you want. We’ve stopped focusing on the basics and have been tricked into focusing on a bunch of numbers that most of us don’t understand. We can’t pay for our education without debt. We can’t fund our homes without debts - most of which will never be paid off before we die, and we can’t fund our twighlight years without govt support of social security. We accept that our senior years will not be as secure and comfortable because we won’t have access to debt in those years.
Those that have a fighting chance in this world are those that embrace the art of financial independence. Not to retire early, but to secure their futures. But if the value of $1 is devalued to half of its buying power (which I would predict will happen), then the future won’t look bright at all. No banks are rewarding you to hold your money. That is a liability to them, and clearly they can get an unlimited supply of money from other banks to loan to you at 15% interest rates for certain loan products, so why would they want to hold your money and reward you for that? The only way to get interest on your savings is to put it in risky investments (mainly equities) which are subject to their own cycles and as I record this podcast, are at historically high values and have been for way too long. The crash of the markets will come and with that, the devaluation of savings will wipe out those gains quickly. Those that are relying in dividend income from this will the severly hurt.
If we get back to basics here, and we understand that we have a list of things we want, and we find creative ways to generate income to pay for them, combined with the patience to realize that it takes time to amass wealth and we have to be willing to wait it out, we can get well ahead of the herd of lemmings out there. And with that comes the advantage of buying those things you want at pennies on the dollar as so much of society will have to give up their property as they get foreclosed on by the banks and you can then pickup those properties at pennies on the dollar.
Contrarian thinking works here. But only with an understanding of money concepts, history and seeing human behavior and realizing when to get off the train before it derails because of our human frailty.
Get back to the basics of finding a way to get the things you want, without having to use a counter party and if that means finding a way to get those things without “money” involved, do that. There must be plenty of ways left that allow for it, even if it means you visit garage sales to buy things at pennies on the dollar and then resell them for 10x their value. That works, and you should think about those things. I certainly do.